#1: Dividend Cutters
Dividend investing may not seem like a typical strategy for young investors, but it can still pay off over the long run. Unless, of course, the dividend stocks you’re holding cut back on their payouts.
If you ask most investors, the prime example they remember is General Electric (GE). The industrial conglomerate slashed its payday from 31 cents a quarter to 10 cents a quarter in 2009 — a 68% slash in dividends that has just started being bulked up again.
So, how do you protect your income? For starters, make sure you examine the distribution history of a stock carefully before even investing. And once you’re in, pay attention to cash flows and earnings history to prevent having your pocket picked by these dividend cutters.
I recommend a simple calculation involving the dividend payout ratio. In short, if a company starts to pay out significantly more in dividends than it does in earnings per share, warning bells should go off. After all, how can stock afford a $2.50 annual dividend per share when its earnings are only $1.50? The math just doesn’t work — and a cut could be looming.